eBay Inc. Reports Strong Third Quarter Revenue and Earnings Growth

October 20, 2010 04:15 PM Eastern Daylight Time

SAN JOSE, Calif.--(BUSINESS WIRE)--Global ecommerce and online payments leader eBay Inc. (Nasdaq: EBAY)
today reported that revenue for the fiscal third quarter ended September
30, 2010, increased 1% to $2.2 billion, or up 10% excluding Skype,
compared to the same period of 2009. The company recorded third quarter
net income on a GAAP basis of $431.9 million, or $0.33 per diluted
share, and non-GAAP net income of $530.6 million, or $0.40 per diluted
share, representing a 14% increase excluding Skype, compared to the same
period of 2009.

The company’s PayPal business delivered strong third quarter
performance, expanding its leadership position in online payments with
growth in revenue, total payment volume and active registered accounts.
PayPal ended the quarter with 90 million active accounts worldwide
adding more than a million new accounts each month during the quarter.
And for the fourth consecutive quarter, Merchant Services net total
payment volume grew 40% or more year over year. The Marketplaces
business continued to make progress in improving the customer experience
and drove customer-focused innovation in key areas, including mobile
commerce and fashion. Sold items, excluding Gmarket, were up almost 13%
year over year and accelerated in the US and UK.

“We delivered strong third quarter results, with great performance at
PayPal and stable results at eBay,” said John Donahoe, eBay Inc.
President and CEO. “PayPal gained share globally and eBay continued to
improve key metrics. Our company is strong and we are managing our
global portfolio to balance strengths, challenges and opportunities,
invest in growth and deliver consistent performance.”

Operating margin – GAAP operating margin for the third quarter
increased to 21.8%, compared to 19.8% for the same period last year.
Non-GAAP operating margin increased slightly to 28.7% for the quarter,
compared to 28.4% for the same period last year, as productivity gains
were offset in part by the impact of a stronger dollar and faster
growth in the company’s lower margin payments business.

Taxes – The GAAP effective tax rate for the third quarter of 2010 was
16%, compared to 20% for the third quarter of 2009. For the third
quarter of 2010, the non-GAAP effective tax rate remained unchanged at
21% compared to the third quarter of 2009.

Cash flow – The company generated $747.1 million of operating cash
flow and $580.1 million of free cash flow during the quarter.

Cash and cash equivalents and non-equity investments – The company’s
cash and cash equivalents and non-equity investments portfolio totaled
$6.1 billion at September 30, 2010, compared to $5.2 billion at
December 31, 2009.

Stock repurchase programs – The company repurchased approximately $300
million of its common stock in the third quarter. In addition, the
company’s board of directors authorized an additional $2.0 billion
stock repurchase program for the purpose of offsetting dilution from
the company’s equity compensation programs.

Increasing financial flexibility – To capitalize on historically low
US interest rates, the company’s board of directors has approved the
issuance of up to $1.5 billion in term debt financing under the
company’s existing shelf registration statement and the establishment
of an up to $1.0 billion commercial paper program. The company may
seek to execute these transactions in the near term, subject to market
conditions. If these financings are consummated, they would enhance
the company’s flexibility to invest in its business and make strategic
acquisitions, as well as finance the Bill Me Later portfolio.

Business Outlook

Fourth quarter 2010 – eBay expects net revenues in the range of $2.39
to $2.49 billion with GAAP earnings per diluted share in the range of
$0.37 to $0.40 and non-GAAP earnings per diluted share in the range of
$0.45 to $0.48.

Full year 2010 – eBay now expects net revenues in the range of $9.05
to $9.15 billion with GAAP earnings per diluted share in the range of
$1.30 to $1.33 and non-GAAP earnings per diluted share in the range of
$1.67 to $1.70.

Quarterly Conference Call

eBay will host a conference call to discuss third quarter 2010 results
at 2 p.m. Pacific Time today. A live webcast of the conference call,
together with a slide presentation that includes supplemental financial
information and reconciliations of certain non-GAAP measures to their
nearest comparable GAAP measures, can be accessed through the company’s
Investor Relations web site at http://investor.ebayinc.com.
In addition, an archive of the webcast will be accessible for 90 days
through the same link.

About eBay Inc.

Founded in 1995 in San Jose, Calif., eBay Inc. (NASDAQ:EBAY) connects
millions of buyers and sellers globally on a daily basis through eBay,
the world’s largest online marketplace, and PayPal, which enables
individuals and businesses to securely, easily and quickly send and
receive online payments. We also reach millions through specialized
marketplaces such as StubHub, the world’s largest ticket marketplace,
and eBay classifieds sites, which together have a presence in more than
1,000 cities around the world. For more information about the company
and its global portfolio of online brands, visit www.ebayinc.com.

Non-GAAP Financial Measures

This press release includes the following financial measures defined as
“non-GAAP financial measures” by the Securities and Exchange Commission,
or SEC: non-GAAP net income, non-GAAP earnings per diluted share,
non-GAAP net revenue excluding Skype, non-GAAP net income excluding
Skype, non-GAAP earnings per diluted share excluding Skype, non-GAAP
operating margin, non-GAAP effective tax rate and free cash flow. These
measures may be different from non-GAAP financial measures used by other
companies. The presentation of this financial information, which is not
prepared under any comprehensive set of accounting rules or principles,
is not intended to be considered in isolation or as a substitute for the
financial information prepared and presented in accordance with
generally accepted accounting principles. For a reconciliation of these
non-GAAP financial measures to the nearest comparable GAAP measures, see
“Business Outlook,” “Non-GAAP Measures of Financial Performance,”
“Reconciliation of GAAP Operating Margin to Non-GAAP Operating Margin,”
“Reconciliation of GAAP Net Income to Non-GAAP Net Income and Non-GAAP
Net Income Excluding Skype,” “Reconciliation of GAAP Net Revenue to
Non-GAAP Net Revenue Excluding Skype,” “Reconciliation of GAAP to
Non-GAAP Effective Tax Rate” and “Reconciliation of Operating Cash Flow
to Free Cash Flow” included in this press release.

Forward-Looking Statements

This press release contains forward-looking statements relating to,
among other things, the future performance of eBay and its consolidated
subsidiaries that are based on the company’s current expectations,
forecasts and assumptions and involve risks and uncertainties. These
statements include, but are not limited to, statements regarding
expected financial results for the fourth quarter and full year 2010 and
the future growth in the Payments and Marketplaces businesses. The
company’s actual results could differ materially from those predicted or
implied and reported results should not be considered as an indication
of future performance. Factors that could cause or contribute to such
differences include, but are not limited to: the continuing impact of
the global economic downturn, changes in political, business and
economic conditions, including any conditions that affect ecommerce
growth; fluctuations in foreign currency exchange rates; the company’s
ability to profitably integrate, manage and grow businesses that have
been acquired recently or may be acquired in the future; the company’s
need to increasingly achieve growth from its existing users,
particularly in its more established markets; the company’s ability to
deal with the increasingly competitive ecommerce environment, including
competition for its sellers from other trading sites and other means of
selling, and competition for its buyers from other merchants, online and
offline; the company’s need to manage an increasingly large enterprise
with a broad range of businesses of varying degrees of maturity and in
many different geographies; the effect of management changes and
business initiatives; the company’s need and ability to manage other
regulatory, tax and litigation risks as its services are offered in more
jurisdictions and applicable laws become more restrictive; any changes
the company may make to its product offerings; the competitive,
regulatory, credit card association-related and other risks specific to
PayPal and Bill Me Later, especially as PayPal continues to expand
geographically and grow its open platform initiative and as new laws and
regulations related to financial services companies come into effect;
the company’s ability to upgrade and develop its systems, infrastructure
and customer service capabilities at reasonable cost; and the
company’s ability to maintain site stability and performance on all of
its sites while adding new products and features in a timely fashion.
The forward-looking statements in this release do not include the
potential impact of any acquisitions or divestitures that may be
announced and/or completed after the date hereof.

More information about factors that could affect the company’s operating
results is included under the captions “Risk Factors” and “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” in the company’s most recent annual report on Form 10-K and
subsequent quarterly reports on Form 10-Q, copies of which may be
obtained by visiting the company’s Investor Relations web site at http://investor.ebayinc.com
or the SEC’s web site at www.sec.gov.
Undue reliance should not be placed on the forward-looking statements in
this release, which are based on information available to the company on
the date hereof. eBay assumes no obligation to update such statements.

eBay Inc.

Unaudited Condensed Consolidated Balance Sheet

December 31,2009

September 30,2010

ASSETS

(In thousands)

Current assets:

Cash and cash equivalents

$

3,999,818

$

4,180,907

Short-term investments

943,986

1,181,615

Accounts receivable, net

407,507

409,807

Loans and interest receivable, net

622,846

725,582

Funds receivable and customer accounts

2,157,945

2,492,856

Other current assets

328,106

463,761

Total current assets

8,460,208

9,454,528

Long-term investments

1,381,765

2,101,405

Property and equipment, net

1,314,328

1,466,047

Goodwill

6,143,086

6,121,481

Intangible assets, net

767,812

586,533

Other assets

341,121

218,068

Total assets

$

18,408,320

$

19,948,062

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$

192,412

$

116,114

Funds payable and amounts due to customers

2,157,945

2,492,856

Accrued expenses and other current liabilities

981,784

1,057,281

Deferred revenue and customer advances

99,305

94,108

Income taxes payable

210,522

48,550

Total current liabilities

3,641,968

3,808,909

Deferred and other tax liabilities, net

929,143

1,054,999

Other liabilities

49,561

50,202

Total liabilities

4,620,672

4,914,110

Total stockholders’ equity

13,787,648

15,033,952

Total liabilities and stockholders' equity

$

18,408,320

$

19,948,062

eBay Inc.

Unaudited Condensed Consolidated Statement of Income

Three Months Ended September 30,

Nine Months Ended September 30,

2009

2010

2009

2010

(In thousands, except per share amounts)

Net revenues (2)

$

2,237,852

$

2,249,488

$

6,356,430

$

6,660,924

Cost of net revenues (1)

643,908

640,268

1,809,067

1,862,194

Gross profit

1,593,944

1,609,220

4,547,363

4,798,730

Operating expenses:

Sales and marketing (1)

491,461

483,653

1,359,277

1,408,050

Product development (1)

205,207

226,803

605,126

662,259

General and administrative (1)

272,177

261,662

797,966

800,505

Provision for transaction and loan losses

96,682

97,964

270,597

296,025

Amortization of acquired intangible assets

72,803

45,957

200,066

148,104

Restructuring

12,673

3,005

36,937

20,437

Total operating expenses

1,151,003

1,119,044

3,269,969

3,335,380

Income from operations (2)

442,941

490,176

1,277,394

1,463,350

Interest and other income (expense), net

(4,606

)

26,825

8,957

47,692

Income before income taxes

438,335

517,001

1,286,351

1,511,042

Provision for income taxes

(88,599

)

(85,072

)

(252,160

)

(269,268

)

Net income

$

349,736

$

431,929

$

1,034,191

$

1,241,774

Net income per share:

Basic

$

0.27

$

0.33

$

0.80

$

0.95

Diluted

$

0.27

$

0.33

$

0.80

$

0.94

Weighted average shares:

Basic

1,293,511

1,308,888

1,288,150

1,303,217

Diluted

1,311,274

1,328,415

1,299,279

1,324,509

(1)

Includes stock-based compensation as follows:

Cost of net revenues

$

11,134

$

11,833

$

37,614

$

36,116

Sales and marketing

28,265

26,350

91,154

80,030

Product development

22,795

24,389

78,546

75,544

General and administrative

30,296

31,208

95,455

96,142

$

92,490

$

93,780

$

302,769

$

287,832

(2)

For the three-month period ended September 30, 2010, foreign
currency movements relative to the US dollar, including the impact
of any effective hedging activities, negatively impacted net
revenues by approximately $42.9 million and negatively impacted
operating income by approximately $35.3 million compared to the
same period of the prior year. For the nine-month period ended
September 30, 2010, foreign currency movements relative to the US
dollar, including the impact of any effective hedging activities,
positively impacted net revenues by approximately $37.6 million
and positively impacted operating income by approximately $2.5
million compared to the same period of the prior year.

On November 19, 2009, the company completed the sale of Skype to
an investor group for cash, a subordinated note and an equity
stake of approximately 30 percent in the outstanding capital stock
of the entity that purchased Skype (which is now named Skype).
Accordingly, Skype’s operating results are not consolidated in the
company’s 2010 results. However, Skype’s results of operations are
consolidated in the company’s 2009 results through the date of
sale. The company’s non-controlling interest in Skype is accounted
for under the equity method of accounting.

eBay Inc.

Unaudited Summary of Consolidated Net Revenues

Net Revenues by Segment

Three Months Ended

September 30,2009

December 31,2009

March 31,2010

June 30,2010

September 30,2010

(In thousands, except percentages)

Marketplaces

$

1,364,583

$

1,463,282

$

1,386,795

$

1,398,334

$

1,411,323

Current quarter vs prior quarter

8%

7%

(5%)

1%

1%

Current quarter vs prior year quarter

(1%)

15%

13%

11%

3%

Percent of Marketplaces revenue from international

56%

60%

60%

58%

57%

Payments

688,063

795,624

809,262

817,045

838,165

Current quarter vs prior quarter

3%

16%

2%

1%

3%

Current quarter vs prior year quarter

15%

28%

26%

22%

22%

Percent of Payments revenue from international

44%

46%

45%

46%

47%

Communications (1)

185,206

112,026

N/A

N/A

N/A

Current quarter vs prior quarter

9%

(40%)

Current quarter vs prior year quarter

29%

(23%)

Percent of Communications revenue from international

81%

81%

Total net revenues

$

2,237,852

$

2,370,932

$

2,196,057

$

2,215,379

$

2,249,488

Current quarter vs prior quarter

7%

6%

(7%)

1%

2%

Current quarter vs prior year quarter

6%

16%

9%

6%

1%

Net Revenues by Geography (2)

Three Months Ended

September 30,2009

December 31,2009

March 31,2010

June 30,2010

September 30,2010

(In thousands, except percentages)

US net revenues

$

1,013,477

$

1,043,310

$

1,004,211

$

1,032,104

$

1,058,258

Current quarter vs prior quarter

6%

3%

(4%)

3%

3%

Current quarter vs prior year quarter

1%

11%

4%

8%

4%

Percent of total

45%

44%

46%

47%

47%

International net revenues

1,224,375

1,327,622

1,191,846

1,183,275

1,191,230

Current quarter vs prior quarter

8%

8%

(10%)

(1%)

1%

Current quarter vs prior year quarter

10%

21%

13%

4%

(3%)

Percent of total

55%

56%

54%

53%

53%

Total net revenues

$

2,237,852

$

2,370,932

$

2,196,057

$

2,215,379

$

2,249,488

Current quarter vs prior quarter

7%

6%

(7%)

1%

2%

Current quarter vs prior year quarter

6%

16%

9%

6%

1%

(1)

On November 19, 2009, the company completed the sale of Skype to
an investor group for cash, a subordinated note and an equity
stake of approximately 30 percent in the outstanding capital stock
of the entity that purchased Skype (which is now named Skype).
Accordingly, Skype’s operating results are not consolidated in the
company’s 2010 results. However, Skype’s results of operations are
consolidated in the company’s 2009 results through the date of
sale. The company’s non-controlling interest in Skype is accounted
for under the equity method of accounting.

(2)

Revenues are attributed to US and international geographies
primarily based upon the country in which the seller, payment
recipient, customer, website that displays advertising, other
service provider or, until the sale of Skype on November 19, 2009,
the Skype user’s Internet protocol address, as the case may be, is
located.

eBay Inc.

Unaudited Payments Supplemental Operating Data

Three Months Ended

September 30,2009

December 31,2009

March 31,2010

June 30,2010

September 30,2010

(In millions, except percentages)

Active registered accounts (1)

78.0

81.0

84.3

87.2

90.5

Current quarter vs prior quarter

3%

4%

4%

3%

4%

Current quarter vs prior year quarter

19%

15%

15%

16%

16%

Net number of payments (2)

273.2

329.0

336.0

335.0

357.0

Current quarter vs prior quarter

5%

20%

2%

0%

7%

Current quarter vs prior year quarter

27%

30%

32%

29%

31%

Net total payment volume (3)

$

17,682

$

21,361

$

21,342

$

21,382

$

22,365

Current quarter vs prior quarter

6%

21%

0%

0%

5%

Current quarter vs prior year quarter

19%

34%

35%

28%

26%

Merchant Services net total payment volume as % of net total
payment volume

56%

57%

59%

61%

62%

Bill Me Later net total payment volume as % of net total payment
volume

1%

1%

1%

1%

1%

Transaction rates (4)

Transaction revenue rate

3.67%

3.54%

3.59%

3.60%

3.57%

Transaction processing expense rate

1.16%

1.14%

1.13%

1.17%

1.18%

Transaction loss rate

0.25%

0.20%

0.18%

0.17%

0.17%

Loan portfolio rates

Risk adjusted margin (5)

8.98%

10.26%

11.53%

12.82%

11.55%

Net charge-off rate (6)

11.53%

11.14%

9.49%

8.56%

7.28%

90-day delinquency rate (7)

4.97%

4.20%

3.84%

3.31%

3.10%

(1)

All registered accounts that successfully sent or received at
least one payment or payment reversal through the PayPal system or
Bill Me Later accounts that are currently able to transact and
that received a statement within the last 12 months.

(2)

Number of payments, net of payment reversals, successfully
completed through PayPal’s payments network and on Bill Me Later
accounts during the quarter, excluding PayPal’s payments gateway
business.

(3)

Total dollar volume of payments, net of payment reversals,
successfully completed through PayPal’s payments network and on
Bill Me Later accounts during the quarter, excluding PayPal’s
payments gateway business.

The risk adjusted margin represents the annualized ratio of Bill
Me Later revenue, excluding contra-revenue incentives to customers
or merchants, less cost of funds, and less net credit and fraud
losses relative to average loans receivable for the quarter.

(6)

Net charge-off rate represents the annualized ratio of Bill Me
Later net credit losses relative to average loans receivable for
the quarter.

(7)

90-day delinquency rate is the ratio of Bill Me Later end of
period account balances that have missed three or more consecutive
payments relative to total ending loan receivables.

eBay Inc.

Unaudited eBay Marketplaces Supplemental Operating Data

Three Months Ended

September 30,2009

December 31,2009

March 31,2010

June 30,2010

September 30,2010

(In millions, except percentages)

Active Users (1)

89.2

90.1

89.5

91.8

93.2

Current quarter vs prior quarter

1%

1%

(1%)

3%

2%

Current quarter vs prior year quarter

2%

3%

1%

4%

4%

Gross Merchandise Volume (excluding vehicles) (2)

$

12,191

$

14,235

$

13,371

$

12,531

$

12,591

Current quarter vs prior quarter

10%

17%

(6%)

(6%)

0%

Current quarter vs prior year quarter

7%

24%

24%

13%

3%

Vehicles Gross Merchandise Volume (3)

$

2,388

$

2,095

$

2,021

$

2,189

$

2,157

Current quarter vs prior quarter

4%

(12%)

(4%)

8%

(1%)

Current quarter vs prior year quarter

(18%)

(4%)

(3%)

(5%)

(10%)

Fixed Price Trading (4) as % of total gross merchandise
volume

56%

56%

57%

59%

60%

eBay’s classifieds websites, Rent.com and Shopping.com are not
included in these metrics.

(1)

All users, excluding users of Half.com, StubHub, and our Korean
subsidiaries (Gmarket and Internet Auction Co.), who bid on,
bought, listed or sold an item within the previous 12-month
period. Users may register more than once, and as a result, may
have more than one account.

(2)

Total value of all successfully closed items between users on eBay
Marketplaces trading platforms during the quarter, regardless of
whether the buyer and seller actually consummated the transaction,
excluding vehicles gross merchandise volume.

(3)

Total value of all successfully closed vehicle transactions
between users on eBay Marketplaces trading platforms during the
quarter, regardless of whether the buyer and seller actually
consummated the transaction.

(4)

Primarily, total gross merchandise volume related to eBay’s “Buy
It Now” feature on eBay Marketplaces trading platforms relative to
total gross merchandise volume during the quarter.

eBay Inc.

Business Outlook

(In Millions, Except Per Share Amounts)

The guidance figures provided below and elsewhere in this press
release are forward-looking statements, reflect a number of estimates,
assumptions and other uncertainties, and are approximate in nature
because eBay’s future performance is difficult to predict. Such guidance
is based on information available on the date of this press release, and
eBay assumes no obligation to update it.

eBay’s future performance involves risks and uncertainties, and the
company’s actual results could differ materially from the information
below and elsewhere in this press release. Some of the factors that
could affect the company’s operating results are set forth under the
caption “Forward-Looking Statements” above in this press release. More
information about factors that could affect eBay’s operating results is
included under the captions “Risk Factors” and “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” in its
most recent annual report on Form 10-K and subsequent quarterly reports
on Form 10-Q, copies of which may be obtained by visiting the company’s
investor relations web site at http://investor.ebayinc.com
or the SEC’s web site at www.sec.gov.

Three Months EndingDecember 31, 2010

(In millions, except per share amounts)

GAAP

Non-GAAP (a)

Revenues

$2,389 - $2,489

$2,389 - $2,489

Diluted EPS

$0.37 - $0.40

$0.45 - $0.48

Twelve Months EndingDecember 31, 2010

(In millions, except per share amounts)

GAAP

Non-GAAP (b)

Revenues

$9,050 - $9,150

$9,050 - $9,150

Diluted EPS

$1.30 - $1.33

$1.67 - $1.70

(a)

Estimated non-GAAP amounts above for the three months ending
December 31, 2010, reflect adjustments that exclude the estimated
amortization of acquired intangible assets of approximately
$55-$65 million, estimated stock-based compensation expense and
employer payroll taxes on stock-based compensation expense of
approximately $90-$110 million and estimated restructuring charges
of approximately $2 million.

(b)

Estimated non-GAAP amounts above for the 12 months ending December
31, 2010, reflect adjustments that exclude the estimated
amortization of acquired intangible assets of approximately
$230-$245 million, estimated stock-based compensation expense and
employer payroll taxes on stock-based compensation expense of
approximately $410-$440 million and estimated restructuring
charges of approximately $20-$25 million.

These non-GAAP measures are not in accordance with, or an alternative
to, measures prepared in accordance with GAAP and may be different from
non-GAAP measures used by other companies. In addition, these non-GAAP
measures are not based on any comprehensive set of accounting rules or
principles. Non-GAAP measures have limitations in that they do not
reflect all of the amounts associated with eBay’s results of operations
as determined in accordance with GAAP. These measures should only be
used to evaluate eBay’s results of operations in conjunction with the
corresponding GAAP measures.

Reconciliation to the nearest GAAP measure of all non-GAAP measures
included in this press release can be found in the tables included on
pages 11, 13 and 14 of this press release.

These non-GAAP measures are provided to enhance investors’ overall
understanding of the company’s current financial performance and the
company’s prospects for the future. Specifically, the company believes
the non-GAAP measures provide useful information to both management and
investors by excluding certain expenses, gains and losses or net
purchases of property and equipment, as the case may be, that may not be
indicative of its core operating results and business outlook. In
addition, because eBay has historically reported certain non-GAAP
results to investors, the company believes that the inclusion of
non-GAAP measures provides consistency in the company’s financial
reporting.

For its internal budgeting process, and as discussed further below,
eBay’s management uses financial measures that do not include
stock-based compensation expense, employer payroll taxes on stock-based
compensation, amortization or impairment of acquired intangible assets,
impairment of goodwill, significant gains or losses from the disposal of
a business, restructuring-related charges and the income taxes
associated with the foregoing. In addition to the corresponding GAAP
measures, eBay’s management also uses the foregoing non-GAAP measures in
reviewing the financial results of eBay.

Stock-based compensation expense. This expense consists of
expenses for stock options, restricted stock and employee stock
purchases. eBay excludes stock-based compensation expenses from its
non-GAAP measures primarily because they are non-cash expenses that
management does not believe are reflective of ongoing operating results.
eBay also excludes its proportionate share of Skype’s stock-based
compensation expense.

Employer payroll taxes on stock-based compensation. This amount
is dependent on eBay’s stock price and the timing and size of exercises
by employees of their stock options and the vesting of their restricted
stock, over which management has limited to no control, and as such
management does not believe it correlates to eBay’s operation of the
business.

Amortization or impairment of acquired intangible assets, impairment
of goodwill and significant gains or losses from the disposal of a
business. eBay incurs amortization or impairments of acquired
intangible assets and goodwill in connection with acquisitions and may
incur significant gains or losses from the disposal of a business and
therefore excludes these amounts from its non-GAAP measures. eBay also
excludes its proportionate share of Skype’s amortization of acquired
intangibles expense. eBay also settled a legal exposure in conjunction
with the disposal of a business and excludes this settlement payment. In
addition, eBay’s results are also impacted by hedge transactions related
to unique movements of cash from significant business acquisitions or
dispositions. eBay excludes these items because management does not
believe they have any direct correlation to the current operating
results of eBay’s business.

Restructuring. These charges consist of expenses for employee
severance and other exit and disposal costs. eBay excludes restructuring
charges primarily because management does not believe they are
reflective of ongoing operating results.

Income taxes associated with certain non-GAAP entries. This
amount is used to present stock-based compensation and the other amounts
described above on an after-tax basis consistent with the presentation
of non-GAAP net income.

The presentation of non-GAAP net income excluding Skype and non-GAAP
earnings per diluted share excluding Skype also excludes, in addition to
the amounts described above, Skype’s 2009 results of operations, which
were consolidated in the company’s 2009 results through the date of sale
(November 19, 2009). The presentation of non-GAAP net revenue excluding
Skype excludes Skype’s 2009 net revenue, which was consolidated in the
company’s 2009 net revenue through the date of sale.

In addition to the non-GAAP measures discussed above, eBay also uses
free cash flow. Free cash flow represents operating cash flows less net
purchases of property and equipment. eBay considers free cash flow to be
a liquidity measure that provides useful information to management and
investors about the amount of cash generated by the business after the
purchases of property, buildings, and equipment, which can then be used
to, among other things, invest in eBay’s business, make strategic
acquisitions, and repurchase stock. A limitation of the utility of free
cash flow as a measure of financial performance is that it does not
represent the total increase or decrease in the company’s cash balance
for the period.

eBay Inc.

Reconciliation of GAAP Operating Margin to Non-GAAP Operating
Margin

Three Months Ended

September 30,2009

September 30,2010

(In thousands, except percentages)

GAAP operating income

$

442,941

$

490,176

Stock-based compensation expense

92,490

93,780

Employer payroll taxes on stock-based compensation

888

2,475

Amortization of acquired intangible assets within cost of net
revenues

13,673

9,604

Amortization of acquired intangible assets within operating expenses

72,803

45,957

Restructuring

12,673

3,005

Non-GAAP operating income

$

635,468

$

644,997

Non-GAAP operating margin

28.4

%

28.7

%

Reconciliation of GAAP Net Income to Non-GAAP Net Income and
Non-GAAP Net Income Excluding Skype

Three Months Ended

September 30,2009

September 30,2010

(In thousands, except per share amounts)

GAAP net income

$

349,736

$

431,929

Stock-based compensation expense

92,490

93,780

Employer payroll taxes on stock-based compensation

888

2,475

Amortization of acquired intangible assets within cost of net
revenues

13,673

9,604

Amortization of acquired intangible assets within operating expenses

72,803

45,957

Restructuring

12,673

3,005

Amortization of intangibles and stock-based compensation for Skype

-

9,469

Contingencies associated with the sale of Skype that were settled
during the quarter

-

(10,000

)

Income taxes associated with certain non-GAAP entries

(40,728

)

(55,631

)

Non-GAAP net income

$

501,535

$

530,588

Non-GAAP net income attributable to Skype

(42,982

)

-

Non-GAAP net income excluding Skype

$

458,553

$

530,588

Diluted net income per share:

GAAP

$

0.27

$

0.33

Non-GAAP

$

0.38

$

0.40

Non-GAAP excluding Skype

$

0.35

$

0.40

Shares used in GAAP and non-GAAP diluted net income per-share
calculation